Business is biggest winner in GOP tax plan

The tax plan released Wednesday by Republican leaders would help businesses more than individuals, but it lacks crucial details needed to say how much it would cost or affect specific people or companies.

“The big winners will be corporations and business owners,” said Joe Rosenberg, a senior researcher with the Tax Policy Center, a joint think tank of the Urban Institute and Brookings Institution.

The Committee for a Responsible Federal Budget reached a similar conclusion in its analysis. It roughly estimated that the plan would generate $5.8 trillion of tax cuts, offset by $3.6 trillion of new tax revenues, resulting in about $2.2 trillion of net tax cuts over a decade, excluding interest.

About $2.8 trillion of the tax cuts would come from reducing the top corporate rate to 20 percent from 35 percent and from other business tax breaks. Of the new revenues, nearly all — $3.3 trillion — would come

from individuals, primarily from killing most itemized deductions, including the one for state and local taxes, which is highly prized in California.

The plan was a joint effort of the Trump administration, House and Senate leaders and the heads of the two chambers’ tax-writing committees.

In a speech in Indiana on Wednesday, Trump called the plan a “revolutionary” change that would produce more jobs, higher pay and lower taxes for middle-class families. “Under our framework the vast majority of families will be able to file their taxes on a single sheet of paper,” he said.

For individuals, it would reduce the number of tax brackets to three — 12, 25 and 35 percent. Today there are seven, ranging from 10 to 39.6 percent. The plan doesn’t say at what income level those rates would stop and start. It left open the possibility of adding another rate somewhere between 35 and 39.6 percent.

It also would almost double the standard deduction — to $24,000 for married people filing jointly and to $12,000 for single people.

However, the plan also eliminates the personal exemption, which lets households deduct $4,050 per person, including dependents. The exemption phases out at higher income levels.

A married couple with two children below the phaseout level would lose $16,200 in personal exemptions, which exceeds the increase in their standard deduction. However, the plan would “significantly” increase the Child Tax Credit and increase the income levels at which that credit begins to phase out. No amounts were given.

The plan would eliminate “most” itemized deductions, including that for state and local taxes, but retain the ones for charitable contributions and mortgage interest. The Tax Policy Center previously estimated that this would reduce the number of households that itemize deductions to 6 million from 45 million.

The plan also would kill the vexing alternative minimum tax. People calculate their tax under the regular system and under the alternative system and pay whichever is higher. State and local taxes are not deductible under the AMT. For some taxpayers, killing the AMT would offset, to an extent, the loss of the state and local tax deduction.

Although the plan would preserve the mortgage interest deduction, the real estate industry is fuming. Homeowners would lose their property tax deduction, and, because far fewer would itemize if the standard deduction were doubled, they would get no benefit from the mortgage interest deduction.

The National Association of Realtors said the result “would all but nullify the incentive to purchase a home for most, amounting to a de facto tax increase on homeowners, putting home values across the country at risk and ensuring that only the top 5 percent of Americans have the opportunity to benefit from the mortgage interest deduction.”

Many economists hate the mortgage interest deduction, saying it mainly helps wealthier people who can afford large homes and encourages them to borrow as much as possible. Some say it artificially drives up housing prices.

The plan also says it “retains tax benefits that encourage work, higher education and retirement security” and would “simplify these benefits and improve their efficiency and effectiveness.”

It’s not clear what would happen to the deductions taxpayers can claim without itemizing. These include deductions for student loan interest, college tuition and fees, educator expenses, certain moving expenses and contributions to health savings accounts.

It seems some of these could be on the chopping block. “Numerous other exemptions, deductions and credits for individuals riddle the tax code. The framework envisions the repeal of many of these provisions to make the system simpler and fairer for all families and individuals, and allow for lower tax rates,” the plan says.

The plan apparently would retain the two taxes levied on higher-income households to pay for Medicare expansion under the Affordable Care Act.

The plan also would repeal the estate tax, which is levied on the portion of estates that exceeds about $5.5 million per person. In 2015, about 26 percent of federal estate taxes came from California, even though California accounts for only 12 percent of the U.S. population.

For businesses, the plan would reduce the top corporate income tax rate to 20 percent from 35 percent. It would let corporations “expense” or immediately write off the cost of assets (other than structures) in the year purchased, rather than writing them off slowly over a number of years as they depreciate. This provision would be in effect “for at least five years.”

Previous plans would have allowed this indefinitely but paired it with a revenue generator: preventing companies from deducting interest expense. The new plan merely limits “the deduction for net interest expense incurred by C corporations,” without further explanation.

It appears that the plan would no longer tax the profits U.S. companies earn abroad. Today, when companies repatriate or bring back to the United States profits earned overseas, they are subject to U.S. income tax, minus whatever foreign tax they paid. The plan calls for moving to a “territorial” tax system, where only profits earned in the United States would be subject to U.S. tax.

However, it also states that “to prevent companies from shifting profits to tax havens, the framework includes rules to protect the U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations.” This appears to contradict a territorial tax system, said Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting.

One of the most controversial parts of the plan involves the taxation of companies structured as sole proprietorships, partnerships, limited liability companies and S corporations. These are known as “pass-through” entities because their profits are not taxed at the corporate level. Instead, they pass through to the owners or partners and are taxed at their individual income tax rates, up to 39.6 percent.

Under the new plan, they would be taxed at a top rate of just 25 percent.

Creating this new rate could be “expensive and problematic,” Rosenberg said. It could encourage people who are employees to become self-employed to get lower rates. The framework acknowledges this problem but doesn’t say exactly how it would fix it.